Landowner Know-How

After a spike in cash rental rates and commodity prices the past two years, many landowners with land enrolled in the Conservation Reserve Program (CRP) think their contract payments need a little cardiac resuscitation. Otherwise, they caution, the patient might die.

North Dakota farmer Wade Feland says CRP rates would have to increase significantly to keep him from pulling 1,060 acres of expiring CRP land from the program over the next two or three years. CRP rates in Feland's area range from $32 to $40 per acre.

"I'd need at least $50 per acre, depending on commodity prices, to re-enroll my CRP ground," he says. The government should take him seriously: Feland has already planted his 2007 expiring CRP acres to sunflowers.

Trying to comply. It's no secret that USDA is struggling to keep 10-year CRP contracts in sync with rent and commodity inflation.

"You're not going to find too many people happy with CRP rental rates," says Todd Jennison, farm programs consultant with Kennedy and Coe, a Kansas-based accounting and consulting firm. "CRP rental rates are nowhere near competitive."

North Dakota is a good case study. In 2005, the state's average cash rents ran $39 per acre; average CRP rates generally ranged from $32 to about $40 per acre. Since then, average cash rents have increased about 10% per year to around $51 per acre, while CRP rates are frozen at less than $40 per acre.

Nationally, the picture is similar. In 2006, the national average cash rent for farmland was $79.50 an acre. The average payment then was about $43.64 per acre for general sign-up CRP ground.

In 2007, national cash rent increased 7% to an average $85 an acre, while the CRP average general sign-up rental rate bumped up less than 0.5% to $43.84 per acre.

By March 2008, USDA increased its average payment only another 30 cents per acre for CRP general sign-up land. Many Iowa and Illinois landowners collected $80- to $100-per-acre pay increases this year, albeit on higher-quality land.

USDA is being pressured on one side by livestock and other grain-buying interests to remove steep penalties and allow more CRP land to go back into production. On the other side, environmental and hunting groups decry the potential loss of wildlife habitat.

"I'd hate to see us lose 20 years of conservation headway getting native grasses established," says Dennis Schulte, a member of a CRP partnership that owns more than 7,000 acres of CRP land in Colorado and Nebraska.

"But if USDA doesn't improve the competitiveness of the program, it's boxing landowners into a corner. You'll go where the money will take you."

Early withdrawal? At presstime, USDA officials had yet to announce any decision on a potential early release of CRP acres. Yet USDA could decide to release the 4 million CRP acres whose contracts would expire in September 2009.

(Detailed CRP rental rates & contract information on next page.) [PAGEBREAK]

It's even possible that landowners would not have to pay the steep penalty to exit their CRP contract, although USDA has so far not favored that approach. Normally, the penalty requires CRP contract holders to pay back all the CRP money they have received under that contract, including cost-share funds, plus interest plus an additional penalty of 25% of one year's rental payment.

USDA Secretary Ed Schafer defended the penalty at a press conference this spring. But he remained open to revisiting terms on contracts that expire in September 2009.

Bruce Babcock, ag economist with the Center for Agricultural and Rural Development (CARD) at Iowa State University, prefers to see penalties eliminated for contracts that expire in the next three years, which covers about 12.5 million acres.

"Bringing back some land into production would free up funds for USDA to increase bids on the most environmentally sensitive land that offers the greatest environmental benefits," he says.

Timing is everything. In 2006, when corn prices were less than $3 per bushel, USDA sent letters to all landowners with CRP contracts expiring in 2007 to 2010, representing almost 28 million acres. More than 80% of those CRP acres were re-enrolled or extended by the deadline in June 2007—months before commodity prices took off.

"If USDA had waited just six months later, there would have been a whole different scenario," explains CARD economist Chad Hart. "I'd call it a severe case of bad timing for the landowner."

The most environmentally sensitive acres were re-enrolled for 10 years with a new contract. The contracts on the less fragile lands were simply "extended" from two to five years.

However, it now turns out "extended" is worse than "re-enrolled" when figuring the penalty for getting out of your CRP contract. Landowners who "re-enrolled" with a new contract only have to return payments from the new contract date (one or two years ago). However, those whose contracts were extended have to pay back all payments from the original contract—10 to 12 years ago.

"This has created an unintended situation," points out Babcock. "The penalty for breaking CRP contracts is smaller for the more environmentally sensitive land than it is for less environmentally sensitive land, because having a new contract greatly reduces the penalty."

If USDA redesignated those extension contracts as "new" contracts, landowners who want out of the CRP program would still pay a penalty, but it would not be as onerous as the current penalties are figured.

Rebid CRP Portfolio. Babcock supports "re-optimizing" CRP through a combination of penalty elimination and aggressive rebidding.

"This would allow USDA to concentrate its payments on keeping the most vulnerable land out of production—which would require significantly higher per-acre rental payments—while allowing land that is not especially vulnerable to be farmed in the 2009 season," says Babcock.

Dennis Schulte agrees a widespread overhaul might not be necessary. "Who knows how long high commodity prices and high cash rents will last? I'd hate to see a short-term panicky fix replace a good, long-term program."